According to newswire MTI, citing daily Vijesti, OTP Bank has signed a preliminary agreement to acquire full ownership of Crnogorska komercijalna banka (CKB), which is the largest commercial bank in Montenegro. The rumoured price of the acqusition is EUR 100m, with the deal to be completed by the end of 2006. An unnamed source at OTP Bank was said to have confirmed that negotiations are in an advanced stage but also that no preliminary agreement has been signed yet.
Given the recent results of CKB (2005A net profit of EUR 2.6m, equity of EUR 18.9m, and assets of EUR 296.5m), the rumoured price looks to be on the high end (historic P/B of 5.3x and P/E of 38.5x). Given that such an acquisition is in line with OTP Bank's regional expansion strategy and of limited size, we would not expect the market reaction to be more than slightly negative. The details expected to be revealed on larger acquitions in Ukraine and Russia in the coming weeks will be more material.
After the announced purchase of Raiffeisenbank Ukraine, expending the bank's enitre excess capital, each new acquisition by OTP Bank is expected to be funded mainly through a disposal of shares. Given our view that shares of OTP Bank trade substantially below fair value, we don't see potential acquisitions (such as CKB) as value accretive for shareholders. While management has to take a long-term view in pursuing acquisitions and there is considerable time for the bank's stock price to recover, we would underline that at these levels, we'd much prefer to see OTP Bank buying back its own shares.
Trading at a 2006F P/E of just 8.0x, at a wide discount to the FTSE 300 Eurobanks index at 11.8x, we believe that a worst-case scenario for Hungary and acquisition risk has been more than priced in. We reiterate our Buy rating on the stock.